You want to calculate Profit Margin or Price Markup? Fair Game.
I’ve put the explanations and an Excel template together. I’m assuming you can read mathematical notation and understand some business terms.
I’ll try and explain some of the concepts and cover Selling Price, Mark-up Percentage, Gross Margin Percentage, and Selling Price Margin which are the sales formulas for businesses.
This isn’t the only Business Math out there, for the full bang check out the book.
Introduction to the uninitiated
In business, there is a vernacular that you need to understand. All business people, managers and owners of businesses understand these terms and how they apply. The terms and phrases convey concepts that are critical to the running and managing of the business without needing to explain it each time it is being talked about.
Examples of this are net, gross, cost of goods, markup, markdown, the margin. Learn them, love them and know what they refer to. A little off track, just as Management has a language, so does every other profession, if you are in sales, you would need to know the terms of the sales like a green field, low hanging fruit, bluebird, closed questions, gatekeeper, decision-maker, and sandbagging.
Skipping to the end
Some of you are only here for the Excel sheet, here you are freeloaders Excel template for Markup and Profit Margin.
Some Definitions if you need them
This paragraph isn’t detailed, I’m working on the assumption you know this. If you need more detail check out the book. Gross refers to the total (everything) and net refers to the part of the total that really matters (what you take home, or were left with). The revenue is what you make (income) from sales, minus discounts and rebates via the main operations of the business. Finally, the cost of goods sold (abbreviated COGS) is a combined value that takes into account numerous out-going money streams such as all the costs of purchase, transport, packaging, material, labour, allocated overhead to store (this is oversimplification it also uses LIFO or FIFO). The goods not sold is deferred as a cost of inventory until the inventory sells or gets written down in value.
We need to go through a very simplistic explanation of pricing. Keep in mind that there are more than 20 strategies to just pricing. Strap in.
An example everyone can connect with is psychological pricing is a strategy that says consumers assume odd or un-rounded prices are perceived lower than they actually are. An example of this would be $ 1.99 or $ 1.98 is perceived as $ 1.00 and not $ 2.00. An easy-ish (I suppose) rounding mistake, unless you are talking about $ 49,999 and the rounding mistakes is $1,000. Now you know why most prices aren’t round numbers.
If you suffer from this mental tick, just practice always rounding up. Psychological pricing is one type of strategy that you can follow. Others are price skimming, price discrimination and yield management, price points, bundle pricing, penetration pricing, price lining, value-based pricing, geo and premium pricing all of which are demand-driven strategies. Again I’m not going into details, I’ll cover these elsewhere.
For my calculation examples, I am going to use a psychological selling price of $1.99 my cost price/purchase price/buy price is going to be $ 1.40
If we know our cost, and selling price, and we want to know the mark-up percentage.
If we don’t have the selling price, but we know the total cost or cost price and have a 42% mark up. For this step, we need to keep in mind that 42% can also be written as 0.42.
Gross Margin Percent
The difference between profit margin (this calculation) and markup (previous calculation) is that profit margin is sales minus the cost of goods sold; meanwhile, markup is the amount by which the cost is increased on a product to arrive at the selling price. Simple right?
To get to the Gross Margin Percent here is the calculation:
Selling Price Margin
If you have a margin requirement of 30% and you know your cost price and need to apply this to your pricing:
We’ve gone through the basic pricing calculations for Markup and Margin.
If you want to learn more about business maths buy the book.